Fundamental Forecast for Euro: Neutral

How is strong is the euro fundamentally? This may seem an easy question. We could look at the performance of EURUSD and say that it is exceptionally robust considering the currency market’s most liquid pair pushed eight-month highs this past week. However, this US dollar’s own pain is undeniably responsible for much of this pair’s gains. What’s more, the buy pressure behind this particular pair (again, which can be heavily influenced by the ebb and flow of the dollar) oftentimes spills over to other euro crosses. This can make it difficult to assess the unique strength or weakness of this shared currency. However, it is essential to establish the euro’s own fundamental bearings when trading the currency; because when the cross market winds die down, those concerns that were previously overlooked can quickly come rushing to the forefront. Such a shifting of gears is certainly probable this week as the dollar runs short on catalyst and the euro falls into its own drivers.

If we are looking to identify the most influential driver for the euro, we should actually gauge the strength of the dollar. The direction of the greenback is not so important as its momentum. The benchmark currency holds such incredible sway over the euro and other counterparts when it is driven by a stiff fundamental wind (just as risk appetite, interest rate speculation or any other dominant driver can take control of price action). For the dollar, the damage has been done with this past week’s FOMC decision to balloon its stimulus program by another $600 billion and lengthen the maturity of the debt it is looking to buy. Having passed this hurdle, a major cloud over the FX market has unleashed its torrent and moved on. That isn’t to say the stimulus theme is passed. As long as risk appetite trends continue to rise, the euro can absorb the capital that is jettisoned from the US. That said, sentiment trends may need a specific catalyst to maintain momentum now that the capital markets are exploring new highs. So, euro traders should keep track of risk trends via the greenback oddly enough.

In the absence of overbearing dollar or risk trends; the euro may actually fall back on its own fundamental drive (not an unusual situation for some of its crosses actually). In the coming week, we have a few big concerns to watch for. On the docket, we have a range of noteworthy economic data; but the indicator with the greatest pull is the 3Q GDP numbers. Most of the big numbers come on Friday; but we should be aware of the Spanish numbers coming out a day earlier. As one of the ‘peripheral’ economies that are struggling to balance recovery with austerity; it is an important one. At the end of the week, we have Greece and Portugal releasing alongside Italy, France, Germany and the Euro Zone. This data is made all the more important for the other primary concern.

Financial stability is quickly deteriorating in Europe according to bond spreads and swap rates. This past week, Irish and Greek 10-year sovereign bond yields surged to records as fears that Germany’s attempts to make bond holders responsible for a portion of future losses chocked off already feeble confidence in the underperforming nation’s around the EU. So far, this troublesome development has been pushed to the background; but if growth figures show the trouble is on both sides; it will be far more difficult to ignore.

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